Inherited Roth IRA Not Distributed within 5 Years

Submitted by Sherry Cadenhead on Wed, 2014-02-05 18:30

I recently learned my client’s father died in 2006. The daughter inherited his Roth IRA. If my math is correct, she should have taken a distribution of the entire account balance by 12/31/12 (since 2009 RMDs were waived). She took a total distribution from the account in December 2013. When I spoke to the broker in December, he wasn’t aware of the inherited Roth distribution rules. His back office confirmed the distribution requirement, also saying the requirements are sent with client mailings. My client can find no such notification from the brokerage firm. My questions concern the Form 5329, as I’m somewhat confused by the instructions.

1. Should an amended 2012 Form 1040 be filed for the daughter, which would include the 5329? Or file Form 5329 with the 2013 1040?
2. What value is used to determine the required distribution?
3. The value of the Roth at actual distribution was approximately $30K. Form 5329 instructions say to pay the penalty (approx. $15K?) and attach a statement requesting a waiver. Is there any reason the form can’t be filed, along with the request for waiver, but without payment of the penalty?



Submitted by Alan - IRA critic on Wed, 2014-02-05 21:39

  1.      Technically, the penalty would be due with the 2012 return. While there is no reason to require a 1040X, the 5329 Inst indicate that a 1040X is required anyway. But with the 2012 1040X and 5329 include a copy of the 1099R showing a total distribution along with the best “reasonable cause” explanation possible to secure the waiver.
  2.  Under 5 year rule, she must take a full distribution.
  3. Use the 12/31/2012 balance on line 50 of the 5329.  The penalty amount is backed out on line 52 snd 52 becomes -0-. Nothing is paid with the form. Most likely she will never hear from the IRS which is good news. She will only hear if they deny the waiver and bill her.
  4. She will report the tax free distribution on her 2013 return on lines 15a and 15b (0 on 15b). No 8606 is needed.

 



Submitted by Sherry Cadenhead on Thu, 2014-02-27 16:57

The account value of the inherited Roth increased by approx $5K between 12/31/12 and the date of distribution in 2013.  The $5K consists of dividends and appreciation of the mutual fund held in the account prior to the distribution to the client.  Seems the $5K should be reported on the client’s 2013 1040, based on the nature of the income in the Roth account; i.e., dividends and capital gains (short-term).  I could include an explanation of this 2013 treatment in the 5329 tax waiver request.  Do you agree with my 2013 proposed treatment on the client’s return?



Submitted by Alan - IRA critic on Thu, 2014-02-27 21:12

The Roth is fully qualified, so all distributions are tax free including earnings generated by failing to take the RMDs. The client should have a 1099R for the total distributions taken in 2013, and that amount will go on line 15a (only) of her 1040. Nothing on 15b since the entire distribution is tax free. Missing the RMD date does not change the taxation of the distribution, it just creates risks of the excess accumulation penalty. But the 5329 is addressing the waiver request, and that penalty being waived would be based on the 12/31/12 value since that was the date that the full value at that time should have been distributed.



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